Smaller environmental consulting and service firms have been hit hard by a combination of changing regulatory policy, maturing markets and more sophisticated client purchasing habits.

Between 1994 and 1996, at least 20 percent of these service firms in 40 states closed, according to a 1998 national survey by Environmental Information Ltd., Minneapolis. In 17 states, at least 30 percent closed.

The numbers are revealing: a total of 883 out of 3,305 firms closed in the two-year period, the report states.

Many of the bellwether states for environmental legislation and regulation were among those with the highest numbers of closures. However, other states with similarly small numbers of firms tended to be more consistent with national averages.

Statistics indicate that firms with fewer than 25 employees had the greatest tendency to close and that the majority of closures occurred among well-established firms with more than seven years' of operating history. Also, the data shows that closures occurred over broad categories of environmental services, rather than being confined to a few specialty services within the industry.

The report noted that many environmental firms were established in an era of increasing environmental regulation. As markets matured, they sustained themselves by replacing services in mature markets with new markets created by regulation.

But the amount of new environmental legislation and regulation has greatly diminished over the last 10 years, leaving environmental service firms without replacement markets.

Not only have there been no new markets, but regulatory reform efforts have erased expected demand from past environmental legislation and regulations.

For example, the use of risk-based analysis of underground storage tanks decreased the market by $9.4 billion from what was originally anticipated. In other cases, projects have been delayed while responsible parties await reform to Superfund and RCRA Corrective Action requirements.

While changing environmental policy and regulatory reform have resulted in decreased demand for professional environmental services, analysts suggest that the situation has been compounded by the failure of these firms to invest in market research. Greater investment in this type of research might have helped these firms avoid over-dependency on maturing or retracting markets.